How Does a “Flash Loan” Differ from a Traditional Collateralized Loan in DeFi?
A flash loan is a unique, uncollateralized loan that must be borrowed and repaid within the same blockchain transaction (or block). Traditional loans require collateral to be posted upfront and can be held for an extended period.
Flash loans are used primarily for arbitrage, collateral swapping, or liquidation exploits, as they allow users to utilize massive amounts of capital instantly without any personal risk of loss, provided the entire operation succeeds atomically.
Glossar
Collateralized Loan
Loan ⎊ A collateralized loan, within the context of cryptocurrency derivatives and financial engineering, represents a credit facility secured by digital assets, options contracts, or other financial instruments.
Uncollateralized Loan
Agreement ⎊ An uncollateralized loan, within the context of cryptocurrency derivatives, options trading, and financial derivatives, represents a credit extension lacking traditional asset-based security.
Flash Loan
Mechanism ⎊ A flash loan is a unique, uncollateralized loan mechanism in decentralized finance that allows users to borrow assets for a very short duration, typically within a single blockchain transaction.
Traditional Loans
Collateral ⎊ Traditional loans, within the context of cryptocurrency derivatives and options trading, fundamentally rely on collateralization to mitigate counterparty risk.